In our previous post, we discussed the importance of carefully drafting the language in your arbitration clause in your LLC operating agreement–or any agreement containing a dispute resolution provision for that matter. One of the issues reviewed in our prior post was who determines what is arbitrable–the arbitrator through the agreement or can the agreement be reviewed by a court? Magenis v. Bruner offers an interesting answer.
In Magenis, the Colorado appeals court reviewed a decision from the district court as to whether an arbitration award was able to be reviewed by the courts.
According to the facts supplied in the court’s opinion, the LLC operating agreement contained an arbitration clause which stated: “[t]he Arbitrator shall award fees and expenses (including reasonable attorneys’ fees) to the prevailing party” in the event of a dispute. This is standard language often included in arbitration clauses. However, in this case, the arbitrator declined to award attorneys’ fees to the prevailing party. As a result, the prevailing party sought the district court’s intervention to modify or vacate the arbitrator’s award, arguing that the arbitrator had no discretion to decline awarding the prevailing party’s attorneys’ fees.
While the district court held that it lacked the authority under the arbitration clause to set aside the arbitrator’s award because it would not “second-guess” the arbitrator’s interpretation of the arbitration clause, the Colorado appeals court disagreed.
While the court of appeals stated that the “powers of an arbitrator derive from the arbitration agreement between the parties and are strictly defined by the terms of that agreement,” by the very terms of the agreement, the arbitrator did not have the power to decline awarding attorneys’ fees to the prevailing party. The simple language in arbitration clause controlled. The arbitration clause clearly stated that the arbitrator “shall” award reasonable attorneys’ fees–meaning the arbitrator lacked the power to decline awarding those fees. “Shall,” as the court recited, meant that the award was mandatory. Based on the terms of the agreement, the arbitrator’s sole role with regards to attorneys’ fees was to determine what was considered a reasonable award.
Thus, the Colorado court of appeals decision came down to simple contract interpretation. Another reminder why the specific language in your agreement matters and care should be taken in crafted its terms.
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